Market news | 29 July, 2019

The global economic deterioration forces to lower the reference rates

Alberto Villasán Investment and Markets Director

The Federal Reserve facing the loss of economic dynamism

Preliminary US activity indicators point to this loss of economic dynamism in the U.S. occurring in the second half of the year.

The start of interest-rate in the United States…

The global economic downturn has once more obliged the U.S. Federal Reserve (Fed) to change its monetary policy and begin to cut its official rates.

This decision has enormous consequences, given that more than half of global financial wealth is held in USD assets. Many multinational companies and governments have some of their debt issued and financed in USD, so their financial health and solvency depend to a large extent on the official rate in the United States.

… in line with our forecasts.

These movements are part of our long-term forecasts, given that we have always maintained the idea that interest-rate rises in developed economies were limited by the enormous quantity of issued debt. The reason put simply is that additional rate hikes could endanger all the economic agents, including companies and consumers.

And the move will probably be followed by the rest of the central banks…

The situation in the rest of the developed economies, such as Japan and Europe, is even more pressing, given that in these cases the level of debt is higher and therefore so is sensitivity to central bank decisions.

That is why statements have begun to be issued by the European Central Bank anticipating new cuts in official rates in the Eurozone, in contrast to what was thought by analysts a few months ago.

… shifting us towards a new structural period of rates that are close to zero or negative.

We consider that this movement of rates closer to zero or even into negative territory will continue as a structural phenomenon over the coming years, as it was in the period 2008 to 2015, or in certain periods at the start of the 20th century.

This situation, known colloquially as financial repression, makes investment difficult for more conservative investors, so a more active and less traditional form of asset management is required.

This proves the validity of our past recommendations.

One example is our idea launched around a year ago of investing in U.S. corporate bonds with a high credit quality (investment grade), offering an annual yield of between 4% and 6%.

The current low interest-rate environment has demonstrated the value of this strategy, which has generated double-digit returns this year.

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